Monday, March 31, 2008

yellow pages - ylo.un

The buggy whip, the paper map, the VCR, the phonebook....which one of these is not like the other one?

Fellow blogger Middle Class Millionaire recently posted about why he believes Yellow Pages Income Fund (YLO.UN) is a 'don't buy'. Let's just say MCM and I agreed to partake in a little 'Stars and Dogs'. I am a holder of YLO.UN, and this is why I am quite comfortable holding, and would rate the stock as a 'buy' for an income oriented investor.

Let me start by saying that when I first heard of Yellow Pages as an investment I immediately thought about the flight to the internet and the death of YLO; that is until I actually did some more thinking and reading on it. Last year when I initiated a position in Yellow Pages Income Fund (YLO.UN), I explained how my decision to buy YLO was rooted in the stability of their distributions. S&P rates YLO's distributions as SR-2 / Stable, which is the second best rating on their scale which ranges from SR-1 to SR-7. Is there any risk that this cash cow will stop the steady stream of cash they deposit in my investment account each and every month? I think not.

You can read my post linked above for the details on why I like Yellow Pages as an income investment. For this current post I'd like to point out what I think are the key points that make this company an excellent hold for anyone looking for income in their portfolio:
  • print directory organic revenue & earnings are growing mid single digits every quarter
  • online revenue has quietly grown to make up 10% of total directory revenue
  • twenty somethings with thai food cravings living in large urban centres make up a small proportion of canadian households
  • fifty something married couples who occasionally need a plumber and really love this new 'internet thing', make up a large proportion of canadian households
  • small business makes up a large proportion of the economy; given the choice to cut costs I believe their Yellow Pages ad would be the equivalent of my Union Gas hookup
  • 56% of YLO's directory advertisers place an ad on their online directory as well
  • Yellow Pages, Autotrader, Canada411 are all great brands with the former two being virtual monopolies
  • the internet is still not a reliable source for organized, complete local information
  • they are partnering with Google in several creative ways, which is wise
  • the company's latest earnings releases have been very solid and management is confident about the future, and their future ability to maintain distributions going through the conversion in 2011

The migration to online has obviously not occurred yet. For evidence of this just have a look at YLO's recent earnings statements. Is the migration expected to happen this year, or maybe next, or maybe in 2010? It is silly to think that a switch will be flipped and instantly electricians, windows and doors, and good Chinese restaurants will be sourced online by the masses. Yes, some will, but I am online frequently, have wireless internet in my home, operate a blog, and am under 30 and if I need a locksmith I'm reaching for the yellow book. What does that say..?

This all being said, there is likely better spots to put your money long term if you are looking for growth of capital. I have no doubt Yellow Pages can continue kicking out cash for a the foreseeable future, however I do believe that their business model has some headwinds in front of it which include the very slow migration online, as well as increasing competition online. I believe the yellow pages directory book will exist for several more years, and the company will continue to diversify itself online. I have faith that the management of Yellow Pages is strong and knows how to make money. They'll continue to leverage these brands and probably acquire new ones that fit their current business plan.

The bottom line is that I don't see the phonebook going away anytime soon. One can not compare Canadian Tire's decision to stop printing a catalogue to Yellow Pages directory business. This is a one-off catalogue from a second rate retailer, as compared to the go to source business and telephone directory for much of the population.


Canadian Capitalist said...

I own YLO as well, so here's my question: where is the competitor? Imagine I am a small business owner running a Thai takeout restaurant. If I want to switch from my current ad in Yellow Pages, where do I turn? An internet competitor for YLO hasn't even appeared yet, let alone taking away market share.

Now imagine that Google wants to compete with an online directory. They have two options: (a) go it alone or (b) acquire YLO. If they chose (a), it can take them years to set up and build relations with hundreds of thousands of small businesses across Canada. Meanwhile, YLO won't be sitting still. They can compete directly with their own online offerings or look at strategic options (Google's competitors might consider option (b)).

MG said...

excellent points.

Also - type in "Plumber + Brantford" into Google and your first hit is Yellow Pages' Find Engine. I still don't think this is the quickest, easiest way to find a plubmer but if someone thought it was...

Susan said...

I have owned YLO for 3 years and am thinking of adding to it for the income. BMO has it in their "TOP 15 Income Stock Selection" list with an outperform and $14 target.

Anonymous said...

I have a question.

We often are encouraged to just buy and hold, the reason being that the market always goes up and even if it goes down for a while we will ultimately win.

But, in the 1929 crash it took the stock market over 20 years to recover back to the 1929 peak. So my question is what do you do if that happens again?

Anonymous said...

YPG has a great management team lead by an aggressive CEO. If he stays for a few more years they will likely make more trader like moves and you may end up with a growth stock.

I sold my YPG during the insane days when the price was way up there. I had bought in during the initial IPO. Have been thinking of jumping back in.

Anonymous said...

Not only are Yellow's distributions safe, they have also announced an ambitious share buyback!

Anonymous said...

I bought this stock after i started reading your blog.I bought at 14.26 and hold on to the stock inspite of its downturn.But i wonder will it come back to 14 dollars? inspite of all the good points.